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Markups and Inequality

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  • Corina Boar
  • Virgiliu Midrigan

Abstract

We characterize optimal product market policy in an unequal economy in which firm ownership is concentrated and markups increase with firm market shares. We study the problem of a utilitarian regulator who designs revenue-neutral interventions in the product market. We show that optimal policy increases product market concentration. This is because policies that encourage larger producers to expand improve allocative efficiency, increase the demand for labour and equilibrium wages. We derive these results both in a static Mirrleesian setting in which we impose no constraints on the shape of interventions, as well as in a dynamic economy with wealth accumulation. In our dynamic economy optimal policy reduces wealth and income inequality by redistributing market share and profits from medium-sized businesses, which are primarily owned by relatively rich entrepreneurs, to larger diversified corporate firms.

Suggested Citation

  • Corina Boar & Virgiliu Midrigan, 2025. "Markups and Inequality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(5), pages 2828-2860.
    • Handle: RePEc:oup:restud:v:92:y:2025:i:5:p:2828-2860.
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    File URL: http://hdl.handle.net/10.1093/restud/rdae103
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